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PEER COMPANIES

Brokerage Elara Capital has initiated coverage on mid-sized technology companies with ‘buy’ ratings on three stocks—L&T Infotech, Zensar Technologies and NIIT Technologies. The brokerage said new technologies are eroding long-held benefits to scale, which had resulted in large technology companies outpacing their smaller peers for two decades. “With new technology, whether it is API-led application development or Cloud migration of a business unit’s applications, large project teams are no longer necessary,” said Elara’s analysts Ravi Menon and Ashish Agrawal in a report on Wednesday. The brokerage has an accumulate rating on Persistent Systems, while on Mphasis, it has a sell rating citing high execution risk and unreliable reported metrics.

L&T Infotech

CMP*: Rs 1,703
Target Price**: Rs 2,130

The brokerage expects significant earnings upgrade for the company. Elara forecasts earnings growth of 20.9 per cent and revenue growth of 21.6 per cent on a compounded basis from FY18 to FY21. The stock’s premium valuations are justified, it said. “With higher growth, a proven ability to scale up clients better than peers and a broad set of growth drivers across all four dimensions, we think LTI deserves a significant P/E premium vs peers, due to the likelihood of a much longer runway of growth,” said Elara.

Zensar Technologies

CMP*: Rs 231.20
Target Price**: Rs 280

Elara expects the company’s earnings to increase 36.3 per cent, revenues to grow 23.6 per cent and operating profit margins to expand 425 basis points from FY18 to FY21. The brokerage said acquisitions continue to be used as “tip-of-the-spear” to get into new accounts and add vertical-specific capabilities, such as Guidewire implementation and support. “We expect the current margins are suppressed due to investments in enhancing capability. While we expect the investments to continue at the present level in absolute terms, we think the company should see operating leverage for these investments,” the brokerage said.

NIIT Technologies

CMP*: Rs 1,152
Target Price**: Rs 1,410

Elara said NIIT Tech is its second top pick after L&T Infotech citing the probability of significant earnings upgrade. “We see long runway of growth, given its demonstrated ability to add new client accounts and scale them to meaningful size,” the brokerage said. Elara said the stock could rerate once the company starts winning larger deals that will lead to in-line growth or growth ahead of peers. “We expect NIIT Tech to enjoy a slight premium to the peer group due to sustained growth and margin. The company is likely to evolve into a significantly larger firm and expect long-term earnings compounding as a result of that growth,” it said.